Dallas-Fort Worth experts weigh in on what's next for commercial real estate

News Date: 
05/06/2020 - 4:15pm

It's been over three months since most of North Texas began feeling the impact from the coronavirus pandemic. Since then, plenty has happened, but there is still a lack of clarity as we move forward on into the long Texas Summer.

As different segments of the area economy are being affected, the Dallas Business Journal checked in with Texas experts in retail, office and industrial real estate to share their thoughts about the current environment and what things could look like moving forward:

INDUSTRIAL: Sector fares better than most

The sector that seems to be holding up best so far has been industrial, which has also been one of the strongest real estate sectors over the last few years. However, it is not without uncertainty.
For starters, some 24 million square feet of new industrial space is under construction in North Texas right now, with only about a quarter having been pre-leased. The number is sizable, especially in the midst of this current economy, but brokers say they're confident that space will get filled.

"To think things won’t be different would be naive, but we're only 30 to 40 days into this,” said Ryan Boozer, partner at Stream Realty Partners. “These developers have underwritten vacancy in their projects and they're not eating into that yet. Some of these e-commerce deals will happen in the short-term, and with these larger blocks, those deals will continue. I don’t think we’ll see huge negative impacts to that absorption."

As with every other sector, some industrial deals have been put on hold, while other activity is moving ahead, some of it propelled by large e-commerce companies and third-party logistics providers. Requirements have been more short-term, too, such as office leases. Industrial landlords have also received some rent relief requests.

But before March, brokers reported two incredibly strong months of leasing and sales activity.  "They were two of the best months we’ve seen. We were on pace for more volume and more deals than we had in both '18 and '19," Boozer said.

Though some distressed properties could appear, brokers say they would likely be on the smaller side, as most large industrial portfolios are owned by well-capitalized institutional investors.
One change we could see from this? The end of just-in-time delivery.

"For a long time, just-in-time delivery was a popular phrase. To be more efficient, don’t ship a product until you need it. Well, we found out how well that works – it doesn’t,” said Allen Gump, executive vice president at Colliers International. “You will see that go away now that everyone has had a taste of what happens when it goes wrong.”

Because the industry entered this pandemic in good shape, brokers believe the recovery will be quick. Still, no one is quite sure what's around the corner.
"How much will be happening remains to be seen,” said Gump. “A lot of companies are figuring out what their game plan will be to satisfy demand. Still, it's too early to know much. Everything right now is anecdotal. There's no playbook for this.

"This is the third major bump I’ve seen,” he said. “Some lasted several years. I've never seen any of them go this far this fast. I can’t relate it to 1986 or 2008. It’s totally different."

RETAIL:  Tough road for tenants and landlords

Perhaps no industry is having a harder time than right now: Tenants are trying desperately to survive while landlords are struggling with rent collection, rent relief requests and mortgages that aren't going away.
"(Dallas-Fort Worth) isn’t behaving differently than most places in the country. When the government tells your retailers to shut down, there’s not a difference in market performance. It’s a national issue," said Terry Montesi, founder and CEO of Trademark Property Co.

"Clearly retail, like hotels and airlines and many other consumer-facing businesses, is under extraordinary strain because they still have fixed expenses with little to no revenue."
Entering 2020, Montesi says his Fort Worth-based firm was predicting its best year ever. The company's leasing and management portfolio includes properties on both coasts and seven large shopping centers in North Texas, including the Galleria Dallas and Alliance Town Center in Fort Worth. Retail landlords and brokers have all been fielding rent relief requests while many have tenants that have applied and been approved for PPP loans. Few have received those funds. Montesi hopes that future rounds of government assistance will not only help more tenants, but also landlords.

"Landlords aren't getting anywhere near the collections they would hope for. There should be some responsibility on the part of the government to help landlords who aren’t getting paid," he said.
The opening of more retail stores in Texas on Friday will help some businesses more than others, experts say. As far as what rents, cap rates and opportunities could look like moving forward, experts say it’s nearly impossible to tell at this point.

"There’s too much uncertainty of what values are and what rents could be. That's why we're in a holding pattern. We can't buy new stuff and we've dropped deals that we had under contract," said Jeff Brand, founder of Dallas-based Brand Partners.

OFFICE: Some activity picks up

The office market saw a big halt in activity during mid-March, but as of late, brokers say some activity has started back up again.

"As of last week, our activity has significantly picked up,” said John Dickenson, managing principal at Dallas-based Holt Lunsford Commercial. “We're back to about 25 percent of standard activity, which has grown from zero. Tenants are starting to get more comfortable and are wanting to get out and make commitments. Those up for renewal are still committing. This is more in the 5,000-square-foot range and below. For larger tenants, a lot have put things on hold."

Some larger deals are still in the works, but commencement dates have been pushed back. Corporate relocations have also been pushed back, some by as much as six months. Dickenson and his team are working on a number of these deals for out-of-state companies. Despite recent hardships, North Texas continues to a top choice for relocations.

Like retail, office landlords have been fielding many requests for rent relief, much of which ends up coming to nothing, brokers say. For new leases and renewals, terms have been shorter as tenants wait to see how the market plays out. While brokers are preparing for slow second and third quarters, they are hopeful for a strong end to the year.

Much has been said about how office space could change post-coronavirus, and brokers agree that density will be impacted. With more people working from home, Dickenson says this could positively impact older office buildings that have historically struggled with parking ratios. Others foresee different impacts.

"Even with people working from home, I don’t think absorption will change that much," said Kim Brooks, principal at Transwestern. "I'm curious to see what happens with benching. It never really took off in my buildings. What you could see will be people going back to bigger cubes. There may also be more questions about janitorial services and air quality. We already hear some rumblings about those now."
With the increased reliance on Matterport cameras for virtual tours, brokers also say that CRE-related technology investment will continue after the pandemic. Developers on the office side also say they have reasons to stay positive, despite many unknowns.

"We have almost 15 projects underway. The bulk of our business is single-tenant, corporate development. We have several large build-to-suits, a few of which have been put on hold. We think it's a temporary pause. On the other hand, we have a couple that are moving forward," said Toby Grove, president at Dallas-based KDC. "I don't think we really know yet where the impact will be. I think personally, on a long-term basis, everything will get back to normal. This is still a great place to be, there will continue to be in-migration, and there are still great development opportunities."